You’ve tested your Product-Market fit, and you believe you’ve found the “emphatic yes” that says there is indeed a market opportunity. Next question: can you build a profitable business based on that opportunity? To figure that out, you need to capture and test assumptions on the cost-side (the left side) of your business model canvas. The cost-side of your business model canvas is used to record your assumptions on:
- Key partnerships you’ll need (and you assume you can develop)
- Key activities involved in running/growing your business
- Key resources you’ll need to run/grow your business
- The Cost structure of your business
The partnerships, activities and resources all feed into the cost structure.
Step 1: Capture your Cost Assumptions
With your team and advisors, walk through the 4 segments of the canvas listed above, and write down your testable hypotheses.
Step 2: Test your Cost Assumptions
Now it’s time to test. Like testing your Product-Market fit, this involves “getting out of the building” and talking with people. But in this case, you’re not talking to customers.
Key Partnerships: Go talk to the partners you’ll need. Or at least go talk to others who have worked with those partners. You want to understand whether/how they will be motivated to work with you, what it will cost, and how the partnership works.
Key activities and Key Resources: One way to test these assumptions is to talk to entrepreneurs who have build similar businesses. That can give you a very helpful reality-check as to what is involved in building your type of business.
Cost Structure: Entrepreneurs who have built a similar business can help with this too. And try talking with CFOs who have experience in your market (or in a similar type of business). An experienced CFO can be an excellent source of “reality check” for you new-business cost assumptions.
Think Ahead to your Financial Projections
Validating cost assumptions is not an academic exercise! You’ll need to thoroughly understand your cost structures to build financial projections – and financial projections are a critically important tool in helping you plan and manage your business and your funding needs. So you need to dig-in and understand your business’ partnerships, activities, resources, and the impact that has on your cost structures. You’re gathering the assumptions and understanding that will underlie your financial projections.